Aeropostale Earnings Preview: Expecting Another Crash

Teen apparel retailer Aeropostale (NYSE:ARO) is under significant duress. Its stock is down almost 97% since 2010, on account of poor financial performance and there has hardly been any sign of improvement in its reported results. The retailer is scheduled to release its Q3 fiscal 2015 results on December 2nd.  Based on its third quarter guidance, it appears that the company will once again report weak results. After posting weaker-than-expected profits for the second quarter of fiscal 2015, Aeropostale guided its third quarter loss per share at $0.30-$0.38, some way below the consensus estimate of $0.30. The third quarter includes a major portion of the crucial back-to-school season and Aeropostale’s guidance clearly indicates that it does not expect much from its season-relevant inventory.

We believe that the company’s overall performance in the U.S. likely remained poor in the third quarter due to a consistent decline in foot traffic and hefty promotional activities. While Aeropostale saw some latent signs of improvement before the second quarter in the form of a marginal rise in average prices, ASPs declined significantly in the second quarter, signalling that revival efforts have not taken off. Also, with the lack of sufficient capital, the retailer has been unable to expand its P.S. from Aeropostale format, which it had earlier consolidated from 150 outlets to just 26 outlets. It will be interesting to see how these factors trended during the third quarter. Also, we will focus on what the management has to say about its recent textile licensing deal.

Our price estimate for Aeroposatle is at $2.22, implying a significant premium to the current market price. We’ll revise our price estimate post the earnings call.

See our complete analysis for Aeropostale

An Increase In Average Prices Seems Unlikely

Aeropostale’s product portfolio is heavily lopsided towards basic logo merchandise, which no longer attracts U.S. buyers. However, in response to the change in the consumers’ buying preferences, the retailer has been aggressively infusing fashion to its merchandise range, hoping to garner higher customer interest. While the retailer hasn’t seen any notable success with this strategy, there have been some signs of improvement. Following four years of mid-single digit declines, Aeroposatle’s average unit prices increased 5% in 2014, driven by better customer response to fashion lines such as Bethany Mota, Pretty Little Liars and Tokyo Darling. However, the retailer lost this momentum in the first half of this year, as average unit retail prices remained flat year-over-year in the first quarter and declined 7% in the second. It appears that the retailer does not have the core strength to even match its average prices of 2014, which is not a tough comparable period. Given its duress, it is imperative for Aeropostale to get its merchandise in line with prevailing customer preferences. The company has been trying to do this for many quarters, but with little success. We are keen to see if Q3 fiscal 2015 was any different.

Not Enough Resources To Expand The P.S. Format

In the wake of dwindling mall traffic, Aeropostale had decided to close all its P.S. from Aeropostale mall based stores, to reopen them in lucrative off-mall locations. From 151 in 2014, the company reduced the brand’s store count to just 26 in Q1 fiscal 2015. While such a drastic reduction in store count would have had a significant negative impact on Aeropostale’s Q3 revenues, it is important to monitor P.S. from Aeropostale’s progress from a long term perspective. The brand has immense growth potential, and the company wants to eventually make its presence in the U.S. comparable to its mainline brand. Although we expected Aeropostale to start expanding the format at desired locations in the second quarter, it did not open any outlets. It appears that company’s lack of cash is hindering with its plans to expand its only promising format. It’ll be interesting to see if it was able to open any P.S. stores in the third quarter.

Textile Licensing Deal In Focus

In October, Aeropostale inked a licensing deal with Himatsingka America to sell home textiles under its brand name. Under the terms, Himatsingka will design and manufacture home textiles such as bedding and bath linens under Aeropostale’s brand name, and distribute them to various wholesale channels and big box retailers throughout North America. The first Aeropostale home collection is expected to hit stores by the back-to-school season next year. The retailer believes that it has enough brand visibility in the U.S. to attract a broader spectrum of customers with products other than casual apparel. While the deal appears a smart move on the outside, it comes with several challenges. However, given that the licensing business will ensure a steady income, it cannot aggravate Aeropostale’s losses any further. If anything, it will help offset the losses from the company’s mainline business. Therefore, it will be interesting to see if the management has any new information to share on the subject.

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